The fixed cost is $400. The marginal cost for widgets 7 and 8 is $150 apiece, or $300 total. The average cost for producing 4 widgets is $300 per widget.

5. A regulator had to choose new regulation A or B: (A) imposed substantial new transaction costs on consumers, while (B) did not. Which option would the Coase Theorem tend to prefer? Say why.

The Coase Theorem states that the efficient result occurs when there are no transaction costs. Therefore the Coase theorem tends to prefer the absence of regulations, or option (B).

6. Explain why a businessman fixes his production or supply of goods at the point where his marginal cost equals his marginal revenue.

If marginal revenue (MR) exceeds marginal cost (MC), then the businessman should sell even more goods to make more profits. If MR is less than MC, then the businessman is losing money with each good and should sell less.

7. Explain the difference between marginal cost and average cost.

Marginal cost is a firm's additional cost for supplying one more good. Average cost is the firm's overall cost for supplying all his goods, averaged over the number of goods he supplies.

Honors: Write a 300-word essay on one or more of the following:

10. Democratic politicians complain about the gap between the rich and poor. Would the economy work any better if the gap were smaller? Assume the absence of transaction costs.

According to the Coase Theorem, this gap is meaningless.

11. The Fifth Amendment says “nor shall private property be taken for public use, without just compensation.” How does that benefit the economy?

The invisible hand is better than government planning, and this protects property for the power of the invisible hand.

12. “The pen is mightier than the sword.” Assuming that the sword is used mainly to seize property, explain a purely economic justification for that statement.

"While the sword can only be used to seize, kill, and destroy, the pen can be used to persuade, educate, and invent. Because of the destructive nature of the sword, the sword is wholly dependent upon what has or will be constructed. The sword can not sustain itself without seizing the property of others, and therefore is inherently dependent upon the pen. If the sword tries to take too much, then the people will despair, and cease producing, causing the sword to starve to death. On the other hand, the pen is not even limited to producing goods. The pen can also be used to persuade the people. For example, the pen can be used to convince the people to revolt, and kill the bearer of the sword, or to stop producing any more than they absolutely need to survive and by doing so to starve the sword to death." (thanks to prior student Eric J. for that)